Thursday, May 8, 2008

Ratings firm also downgrades credit

The rating agency also said it expects Chrysler to continue with a strategy that could involve shutting down more assembly plants.

The rare public analysis of Chrysler's financial health came Wednesday when Fitch downgraded its credit rating on Chrysler LLC, and warned that its outlook for the automaker's ratings is negative.

The sour economy, Chrysler's market share losses, and decisions to eliminate poor-selling models, cut production and scale back on fleet sales have all pushed down vehicle sales and revenues for the Auburn Hills automaker and led the agency to cut its ratings on Chrysler to B from B-plus.

"Chrysler's restructuring efforts remain on track, and liquidity is expected to remain adequate over the near term to fund restructuring costs and operating losses through a period of economic weakness," Mark Oline said in a note.

Since Chrysler went private in August, it's been hard to judge its financial status against publicly traded peers such as Ford Motor Co. and General Motors Corp., both of which, according to Brian Bertsch, a Fitch spokesman, the agency has rated as B with negative outlooks -- the same as Chrysler.

Chrysler's sales are down 18% so far this year compared with last year. Sales of light trucks -- the pickups, SUVs and minivans that dominate Chrysler's lineup -- are down 23%.

Last week in an interview with the Free Press, Chrysler CEO Bob Nardelli stressed that the automaker is meeting its internal goals. Lori McTavish, a Chrysler spokeswoman, reiterated that Wednesday: "Since the return of Chrysler as an independent company, we've been meeting and in many cases exceeding our financial targets."

Since August, the automaker has made sweeping changes, eliminating as many as 12,000 jobs and four products and cutting back on unprofitable fleet sales.

Oline views the steps as positive for the company's long-term health. In a better economy, he adds, the cost reductions would quickly flow to the bottom line.

"However, the severe impact of weakening economic conditions has made this more challenging, and has extended the timeline projected for a potential reversion to positive cash flow," he wrote.

Chrysler has also announced plans to idle its Delaware assembly plant in 2009 and is believed to be quietly shopping its axle business to potential buyers.

More than just cutting products, Chrysler is looking to partner with other automakers to use their manufacturing abilities to augment their vehicle lineups. In April, Chrysler and Nissan Motor Co. announced a deal in which the two automakers will share some specific vehicles, allowing Chrysler to get a Nissan-made small car to sell under one of its brands in North America and elsewhere.

"Fitch expects that Chrysler will continue to employ an 'asset-lite' approach that could involve additional assembly plant shutdowns," Oline wrote. "Alliances and/or contract manufacturing will play a role in this decision, and Chrysler is expected to continue to pursue such arrangements on a global basis. Tie-ins with other global OEMs are expected to focus on growth in the company's brand, engineering and distribution capabilities, but requiring minimal capital investment."

A February 2007 turnaround plan by Chrysler promised to reduce material costs by $1.5 billion by next year.

"Variable purchasing, material and other efficiencies have been more difficult to realize as rising commodity costs have offset other progress," Oline wrote. "Cost reductions and the new UAW contract have positioned the company to moderate operating losses during the current economic weakness, but a return to positive free cash flow is likely to require an upturn in the construction market and Chrysler's pickup sales."

The rating agency also said it expects Chrysler to continue with a strategy that could involve shutting down more assembly plants.

The rare public analysis of Chrysler's financial health came Wednesday when Fitch downgraded its credit rating on Chrysler LLC, and warned that its outlook for the automaker's ratings is negative.

The sour economy, Chrysler's market share losses, and decisions to eliminate poor-selling models, cut production and scale back on fleet sales have all pushed down vehicle sales and revenues for the Auburn Hills automaker and led the agency to cut its ratings on Chrysler to B from B-plus.

"Chrysler's restructuring efforts remain on track, and liquidity is expected to remain adequate over the near term to fund restructuring costs and operating losses through a period of economic weakness," Mark Oline said in a note.

Since Chrysler went private in August, it's been hard to judge its financial status against publicly traded peers such as Ford Motor Co. and General Motors Corp., both of which, according to Brian Bertsch, a Fitch spokesman, the agency has rated as B with negative outlooks -- the same as Chrysler.

Chrysler's sales are down 18% so far this year compared with last year. Sales of light trucks -- the pickups, SUVs and minivans that dominate Chrysler's lineup -- are down 23%.

Last week in an interview with the Free Press, Chrysler CEO Bob Nardelli stressed that the automaker is meeting its internal goals. Lori McTavish, a Chrysler spokeswoman, reiterated that Wednesday: "Since the return of Chrysler as an independent company, we've been meeting and in many cases exceeding our financial targets."

Since August, the automaker has made sweeping changes, eliminating as many as 12,000 jobs and four products and cutting back on unprofitable fleet sales.

Oline views the steps as positive for the company's long-term health. In a better economy, he adds, the cost reductions would quickly flow to the bottom line.

"However, the severe impact of weakening economic conditions has made this more challenging, and has extended the timeline projected for a potential reversion to positive cash flow," he wrote.

Chrysler has also announced plans to idle its Delaware assembly plant in 2009 and is believed to be quietly shopping its axle business to potential buyers.

More than just cutting products, Chrysler is looking to partner with other automakers to use their manufacturing abilities to augment their vehicle lineups. In April, Chrysler and Nissan Motor Co. announced a deal in which the two automakers will share some specific vehicles, allowing Chrysler to get a Nissan-made small car to sell under one of its brands in North America and elsewhere.

"Fitch expects that Chrysler will continue to employ an 'asset-lite' approach that could involve additional assembly plant shutdowns," Oline wrote. "Alliances and/or contract manufacturing will play a role in this decision, and Chrysler is expected to continue to pursue such arrangements on a global basis. Tie-ins with other global OEMs are expected to focus on growth in the company's brand, engineering and distribution capabilities, but requiring minimal capital investment."

A February 2007 turnaround plan by Chrysler promised to reduce material costs by $1.5 billion by next year.

"Variable purchasing, material and other efficiencies have been more difficult to realize as rising commodity costs have offset other progress," Oline wrote. "Cost reductions and the new UAW contract have positioned the company to moderate operating losses during the current economic weakness, but a return to positive free cash flow is likely to require an upturn in the construction market and Chrysler's pickup sales."